Sector selection investment option in a variable insurance product

ABSTRACT

The present invention provides a combination of the investment methodology known as sector rotation with tax-advantaged investment products, particularly, variable annuity and variable life insurance products and combination insurance products. The sector rotation methodology is implemented through purchase of appropriate funds, such as equity mutual funds, exchange traded funds, or index funds which are available through such variable annuity and variable life insurance products and combination insurance products, and such funds being determined by an asset allocation or style-driven model created by an insurance company or investment adviser. In one embodiment, the sector rotation methodology is implemented through a fund of funds approach.

FIELD OF THE INVENTION

[0001] The present invention relates to the field of financial productsand methods used in connection with retirement income planning andinvesting.

BACKGROUND OF THE INVENTION

[0002] An annuity contract in its simplest form is a contract between aninsurance company and a contract owner that provides for payments to anannuity beneficiary at regular intervals during the life of a specifiedindividual, the annuitant. Annuities play a significant role in avariety of contexts, including life insurance, disability insurance, andpensions. For example, life insurance may be purchased by making premiumpayments with the lifetime income payments provided by an annuityinstead of by a single premium. In many cases, the proceeds of a lifeinsurance policy payable upon the death of the insured may be convertedthrough a settlement option into an annuity for the beneficiary. Anannuity may be used to provide periodic payments to a disabled workerfor so long as the worker is disabled. Retirement plan contributions maybe used to purchase immediate or deferred annuities payable duringretirement.

[0003] A life insurance policy in its simplest form is a contractbetween an insurance company and a policy owner that provides forpayment of a death benefit upon the death of a specified individual, theinsured. Life insurance plays a significant role in a variety ofcontexts.

[0004] Life insurance products and annuity products (together,“insurance products”) are considered tax-advantaged investment productsbecause the United States Internal Revenue Code (the “Code”) generallyallows for deferral of income taxes on investment growth until the timethat the earnings from the investment are withdrawn. Annuity taxtreatment differs significantly from that of retail mutual funds andother securities in taxable accounts (collectively, “non-tax advantagedinvestments”) in that all gains and investment income earned within theproduct are sheltered from tax until the contract owner surrenders orpledges his contract (except in certain cases involving “non-natural”contract owners). This ability to defer income tax is a major taxadvantage of annuities over non-tax advantaged investments. Also, andwith particular significance to the invention, in many annuity products,the contract owner can transfer account value between investment optionswithout incurring a tax consequence. However, it should be noted thatupon surrender or pledge of the contract, the owner's gain is taxed asordinary income, in contrast to the treatment of non-tax advantagedinvestments, where the gain is generally taxed using the more favorablecapital gains tax treatment. If a contract owner wishes to partiallysurrender the annuity, e.g., extract some amount of cash from hisaccount value, these amounts will be taxed on a last in first out (LIFO)basis. As an example, if the contract owner had paid in $100,000, nowhas a contract account value of $300,000, and wishes to extract $50,000in cash, he will be fully taxed on the $50,000, because the gain in thecontract is $200,000 and that gain must be withdrawn first under theLIFO rules.

[0005] Life insurance products are familiar financial products thatinclude a death benefit component. Certain life insurance products, suchas whole life and universal life insurance products, also include a cashvalue accumulation component. As with an annuity contract, a lifeinsurance policy's cash value grows on a tax-deferred basis. And as withmany annuity contracts, many life insurance policies provide that thepolicy owner may transfer account value among investment options withoutany tax consequences; this advantage has particular significance inconnection with the invention. The cash value can be borrowed orreceived upon termination of the policy, and can often be withdrawn witha corresponding reduction in the death benefit. Amounts borrowed,withdrawn, or received upon surrender are not taxed except to the extentsuch amounts exceed the policy owner's investment in the contract(sometimes referred to as “basis”).

[0006] There are a number of different ways of classifying insuranceproducts. In one method, insurance products can be classified accordingto how premium payments are invested and how insurance benefits aredetermined. According to this method, insurance products can be dividedinto two general categories: fixed or general account products (“fixedinsurance products”), and variable or separate account products(“variable insurance products”). In addition, there is a hybrid type ofproduct that combines both fixed and variable elements (“combinationinsurance products”).

[0007] In the case of fixed insurance products, the insurance companyguarantees certain benefits. More specifically with respect to fixeddeferred annuities (see paragraph 10 for discussion of immediate vs.deferred annuities), the insurance company generally guarantees acertain rate of interest for a period of time on premiums paid in theaccumulation phase (see paragraph 11). Once the guarantee period isover, a new interest rate is set for the next period. This guarantee ofboth interest and principal makes fixed annuities somewhat similar toCertificates of Deposit (CDs) purchased from a bank. During the incomephase, the contract guarantees fixed income payments based on thecontract's account value at the start of the income phase and an annuityinterest rate that will be not less than a rate guaranteed in thecontract. Similarly, with respect to fixed life insurance, the policytypically guarantees a fixed death benefit and cash values at certainpoints based on the scheduled premium payments. Fixed insurance productsare sometimes also called general account products because the issuinginsurance company receives premiums into and makes guaranteed paymentsfrom its general account. The insurance company will usually invest theassets in its general account conservatively with an emphasis on fixedincome assets such as high-grade corporate bonds. Accordingly, benefitsin fixed insurance products tend to be relatively modest.

[0008] If a prospective contract or policy owner desires the potentialfor greater benefits than those afforded by the conservative investinginherent in fixed insurance products, he may purchase a variable annuitycontract or a variable life policy. In the case of variable insuranceproducts, the insurance company generally does not guarantee theproduct's benefits, nor its account or cash values. Instead, thebenefits and values will be wholly or largely determined by theinvestment performance of the assets underlying the product. Withvariable insurance products the insurance company makes available to theowner a number of investment options in a separate account, sometimescalled the variable account. The investment options are usually calledsub-accounts. The contract owner or policy owner chooses from amongthese sub-accounts to invest his premiums. The sub-accounts in turngenerally invest in mutual funds, which are generally open-endmanagement investment companies regulated pursuant to the InvestmentCompany Act of 1940, and managed by registered investment advisers. Thetypical investment options are a range of mutual funds that generallycan be characterized using the common labels of fund types, such as“growth funds” or “value funds” or “balanced funds.” In addition, fundscan be characterized as “equity,” “fixed income,” and “cash” or “moneymarket.” These mutual funds may invest in a number of different kinds ofsecurities, including equities, which traditionally have afforded ahigher return than fixed income securities. Account value and incomepayments in a variable annuity will be determined by the performance ofthe underlying mutual funds. Similarly, with respect to variable lifeinsurance, the policy's cash and surrender values and death benefit willbe determined by the performance of the underlying mutual funds. Thus,variable insurance products are sometimes called separate accountproducts because the issuing insurance company receives premiums intoits separate account and invests them according to instructions receivedby the product's owner, and the insurance company makes benefit paymentsfrom the separate account based on the product owner's account value.

[0009] A combination insurance product is an annuity contract or lifeinsurance policy that provides the owner with the opportunity to splithis insurance premiums between a fixed element and a variable element.As with a fixed insurance product, the fixed element of the productguarantees both principal and interest and benefits, much like a fixedannuity. As with a variable insurance product, the variable element ofthe product does not guarantee principal or interest or benefits oraccount or account values, but does allow the contract owner to selectpotentially higher risk/higher reward investment options in the variablesub-accounts. The combination insurance product is desirable to providea guarantee to the owner that his capital will be preserved (or adesired portion thereof), while still giving a variety ofmarket-dependent investment options providing the possibility ofenhanced investment returns, with the efficiency of offering all of thisin one product.

[0010] In addition to their classification according to the manner ofinvestments (fixed or variable), annuities can also be classifiedaccording to when their periodic income payments begin. “Immediateannuities” are contracts generally funded by a single premium paymentwherein the periodic income payments to the owner or beneficiary mustbegin within one year of the issue date of the contract; in most casesincome payments begin within a month of the issue date. “Deferredannuities” are contracts wherein the periodic income payments will notcommence until some time after a year has passed; typically theycommence by reference to the owner or annuitant attaining a specifiedage, e.g. 65. Until that specified date (the “income date”), thedeferred annuity is in the accumulation phase. In that phase, one ormore premium payments may be made and account value grows on atax-deferred basis. Thus for example, a person may fund a deferredannuity and, upon retirement of that person, the issuing insurancecompany pays the retiree a series of periodic income payments. Suchproducts are desirable because the earnings remain invested and grow ona tax-deferred basis; income tax is incurred only when the periodicincome payments are received, typically when the retiree is in a lowertax bracket. Some annuity products allow the annuity recipient toreceive the annuity funds as a lump sum.

[0011] As mentioned above, annuity products may be funded by way of asingle payment, or by way of multiple payments (“flexible paymentproducts”). The same is also true of life insurance policies. However,traditional life insurance products that involve multiple premiumpayments are actually scheduled premium products. In other words, inorder to keep the policy in force the policy owner must make premiumpayments of a pre-determined amount at scheduled points in time. Morerecently, “universal” life insurance products have been developedallowing for some flexibility in the payment of premiums. Thus,insurance products can be further classified as single payment orflexible payment or scheduled payment products.

[0012] Annuity contracts typically offer several different methods ofperiodic payments in the payout phase, regardless of whether suchcontracts are immediate or deferred. In almost all cases, an annuitycontract will offer a life annuity, under which the annuity beneficiaryis paid from the income date until death of the annuitant (who isusually but not always the same person as the annuity beneficiary).These contracts are administered in the same way as a life insurancecontract, using life expectancy tables, so that the insurance companythat sells the annuity is assured of a profit on the annuity businessover a sufficient customer population—assuming its mortality assumptionsare accurate. Annuities in their payout phase can provide fixed,variable, or a combination of fixed and variable annuity payments.

[0013] The payout phase is often for the life of the annuitant who isusually, but not always, the annuity owner. Annuity contracts will alsooften provide for payout phases based on the life of the annuitant and asecond person (such as the annuitant's spouse). They may also providefor periodic payments for a specific period of time, such as 15 years,or for the longer of the annuitant's life or a specific period of time.In annuity products where a life contingent periodic payment option iselected, the annuity issuer bears the risk that the annuitant will livelonger than predicted. The contract owner bears the risk of dying soonerthan expected

[0014] In the field of financial products, and hence by extension in thefield of variable insurance products, an investment strategy known asasset allocation has been developed. Asset allocation generally involvesstrategically investing one's available funds among several or moreasset classes (equity securities, fixed income securities, cash or moneymarket) in order to reduce the investment risk inherent in investing inone asset class, while potentially helping to enhance investmentreturns. Generally, the process of asset allocation in a variableinsurance product includes a contract or policy owner's attempt todetermine his investment profile by assessing his (a) level of risktolerance/risk aversion, (b) investment time horizon, and (c) investmentgoals. Often, this process can be accomplished by way of a risk profilequestionnaire that can be scored with a result that indicates theowner's investment profile. After the owner's profile has beendetermined, he has the opportunity to invest in asset classes(represented by sub-accounts investing in mutual funds) within thevariable insurance product according to what the profile would suggest.

[0015] In the field of variable insurance products, a program has beendeveloped to aid the owners of variable insurance products in thestrategy known as asset allocation. In that program, the insurancecompany, or an investment advisory firm or individual with which theinsurance company or contract or policy owner contracts (“advisor”),creates asset allocation models that correspond to named investorprofiles. In these models, the model creator indicates the exactpercentage of the owner's account value that should be invested in assetclasses (represented by sub-accounts investing in corresponding mutualfunds). Some models might have higher levels of equity investmentsindicating a profile with a long investment time horizon and/or aboveaverage risk tolerance, and others might have lower levels of equityinvestments and higher levels of fixed income investments and/or cashinvestments indicating a profile with a shorter investment time horizonand/or an above average risk aversion. Generally, there may be 3 to 8such asset allocation models corresponding to the named investmentprofiles (e.g., Asset Preservation, Strategic Income, Income and Growth,Conservative Growth, Moderate Growth, Aggressive Growth). The profilesuggests the appropriate model the owner may wish to select, and themodel then dictates the allocation of the owner's account value amongappropriate asset classes (represented by sub-accounts investing incorresponding mutual funds) within the product.

[0016] Often, asset allocation programs offered by insurance companiesin connection with variable insurance products will provide for aperiodic rebalancing of the investments within an owner's selected modelto the percentages indicated in the model. This is because thereinvestment of dividends and income and the changes in investments'valuation will have caused certain investments to grow to exceed therecommended percentages, while others will have suffered losses causingthem to be lower than the recommended percentages. Often, thisrebalancing is done quarterly on an automatic basis with no initiationor intervention needed by the owner.

[0017] Generally, the creator of the models will monitor the factorsthat it used to devise each model with an eye to revising models. Suchfactors may include the general economy, trends within industries orsectors in the economy, key indicators of the issuers that are theunderlying securities for the mutual funds which the sub-accounts investin, etc. The asset allocation program offered by the insurance companymay include a scheduled periodic review and revision of the models bythe insurance company or adviser, with the insurance company thereaftermaking the necessary reallocations to bring each owner's contract inline with the new recommended components and percentages of his chosenmodel. The program may also include the ability for the insurancecompany or adviser to change the components and percentages of themodels between the scheduled dates in the event of extraordinarycircumstances; again, the insurance company would then align eachowner's contract accordingly.

[0018] In the field of financial products, and hence by extension in thefield of variable insurance products, a strategy for investing has beendeveloped based on the theory that some securities may be characterizedas having certain traits in common. For example, some believe thatcertain securities can be characterized as “growth” securities, whileother securities may be characterized as “value” securities. Generally,growth securities will be those that are perceived as offering the bestpotential for long-term capital gains, they generally offer little or nodividends, and they may have a higher risk profile. Generally, valuesecurities will be those that may be undervalued according to formulasdeveloped by analysts. Competing theories, generally supported byempirical evidence, will suggest that staying invested in one or theother type of security is likely to lead to the best long terminvestment results, and/or that one or the other type is the bestinvestment value at a particular time. These strategies for investingbased on the characterization of securities in certain types might becalled “style-driven” investing.

[0019] In the field of variable insurance products, insurance companieshave provided support for owners who adhere to a style-driven investmentstrategy by developing models that correspond to various styles ofinvesting. In these models, the insurance company, or an adviser,indicates the exact percentage of the owner's account value that shouldbe invested in asset classes (represented by sub-accounts investing inmutual funds) that are considered to be investments corresponding to thepreferred style.

[0020] As with asset allocation programs, style-driven model programsoffered by insurance companies in connection with variable insuranceproducts will generally provide for a periodic rebalancing of theinvestments within an owner's model to the percentages indicated in themodel. This is because the reinvestment of dividends and income and thechanges in investments' valuation will have caused certain investmentsto grow to exceed the recommended percentages, while others will havesuffered losses causing them to be lower than the recommendedpercentages. Often, this rebalancing is done quarterly on an automaticbasis with no initiation or intervention needed by the owner.

[0021] As with asset allocation models, generally, the insurance companyor an advisor will monitor the factors that it used to devise eachstyle-driven model with an eye to revising models. Such factors mayinclude the general economy, trends within industries or sectors in theeconomy, key indicators of the issuers of the underlying securities,etc. The program offered by the insurance company may include ascheduled periodic review and revision of the models by the insurancecompany or the adviser, with the insurance company making the necessaryreallocations to bring each owner's contract in line with the newrecommended components and percentages of the model. The program mayalso include the ability for the insurance company or adviser to changethe components and percentages of the models between the scheduled datesin the event of extraordinary circumstances; again, the insurancecompany would then align each owner's contract accordingly.

SUMMARY OF THE INVENTION

[0022] It is an object of the invention to provide a tax-advantagedinvestment product with the possibility of substantial investmentreturns in the form of a variable annuity or variable life insuranceproduct, or a combination variable annuity or variable life insuranceproduct, that is designed to provide the owner with an alternativeinvestment strategy involving rotation of investment allocation amonginvestments representing specific sectors of the economy in an effort tooptimize investment returns.

[0023] In accordance with one embodiment of the invention, a method ofadministering a variable annuity or life insurance product (orcombination product) comprises steps in which an insurance companyreceives a premium payment for the product and allocates at least aportion of the premium payment to a variable account in the form of oneor more sector investment options (represented by sub-accounts investingin mutual funds) pursuant to an asset allocation model or style-drivenmodel selected by the contract or policy owner. (The same step may berepeated for subsequent premium payments, or may be initiated at anypoint after the initial premium payment, by using the contracts orpolicy's account value.). In one preferred embodiment involving avariable insurance product, the insurance company allocates a secondportion of the premium payment to a fixed income investment option. Theinsurance company, or an investment adviser selected by the insurancecompany or contract or policy owner will periodically review the modelsand determine if alternate sector investment options and/or changing theweighting of existing recommended sector percentages provide a greaterpotential investment return and/or less potential risk given the currentstate of the economic cycle and other considerations pursuant to thesector selection rotation investment methodology. If so, the insurancecompany or adviser, as appropriate, will revise the asset allocation orstyle-driven models and the insurance company will reallocate theappropriate amount of account value among the various sector investmentoptions (represented by sub-accounts investing in mutual funds) for eachowner participating in an affected model.

[0024] Other objects, aspects and features of the invention in additionto those mentioned above will be pointed out in or will be understoodfrom the following detailed description in conjunction with thedrawings.

BRIEF DESCRIPTION OF THE DRAWINGS

[0025]FIG. 1 is a flowchart showing the steps of one embodiment of amethod in accordance with the invention.

[0026]FIG. 2 is a flowchart showing the steps of one life insuranceembodiment of a method in accordance with the invention.

[0027]FIG. 3 is a flowchart showing the steps of one annuity embodimentof a method in accordance with the invention.

[0028]FIG. 4 is a flowchart showing implementation of the invention inone software embodiment.

[0029]FIG. 5 is a flowchart showing typical sector rotation within acomplete economic cycle.

DETAILED DESCRIPTION OF THE DRAWINGS

[0030] The present invention provides a combination of the investmentmethodology known as sector rotation with tax-advantaged investmentproducts, particularly, variable annuity and variable life insuranceproducts and combination insurance products. The sector rotationmethodology is implemented through purchase of appropriate funds (by wayof the product's sub-accounts), such as equity mutual funds, exchangetraded funds, or index funds which are available through such variableinsurance products or combination insurance products. One commercialimplementation of the concept of the invention is described in the“Choice Prospectus” for “Combination Fixed and Variable Annuity” issuedby Sage Life Assurance of America, Inc., and dated May 1, 2002, thedisclosure of which is hereby incorporated by reference.

[0031] Sector rotation methodology is an active asset managementstrategy that increases investment in equities of companies in sectorsof the economy at a time when those sectors are expected to have growingrevenue or profitability. The sector rotation methodology is based onthe expectation that the economy follows a fairly predictable businesscycle, with different sectors showing increasing business activity indifferent periods of the business cycle. FIG. 5 illustrates the typicalpath of economic activity as it rotates among sectors in a typicaleconomic cycle. Where a sector is increasing in activity, and revenueand profits are increasing for companies in that sector, the value ofstock equities for companies in that sector will generally increase.This provides a methodology for the investor to seek to predict andprofit from the change in business activity among different sectors overthe course of the business cycle. In addition to this broad notion ofinvestment returns tied to the business cycle, there are often broadtrends in particular industries that indicate profitability (or losses)for the entire sector, and a sector rotation investor is sensitive tosuch trends, and the change in value of equities arising from suchtrends.

[0032] Accordingly, sector investing follows a “top-down” investmentapproach that begins with the economic outlook and assesses whichsectors are likely to benefit from expected changes in the economy. Thisstrategy focuses on (a) the forecast for key economic variables, such asinterest rates, inflation, and consumer spending; (b) how differentsectors performed in similar cycles in the past; and (c) the sectorslikely to thrive in the forecast environment over the next 12 to 18months.

[0033] Sector investors therefore “rotate” among sectors in order toincrease investment exposure to the expected best performing sectors andreduce exposure to the expected worse performing sectors. However, aninvestor's investment profile may suggest that other factors may alsoneed to be taken into consideration and require supplementing orfine-tuning the straight sector rotation investing approach. Forexample, some investors' profiles might suggest that income is equallyor perhaps even more important than capital gains, while others mightsuggest that capital preservation is the pre-eminent consideration.Carefully differentiated asset allocation models and style-driven modelsmay therefore useful to the investor who also wishes to participate insector investing relying on the sector rotation methodology.

[0034] In particular, while the stock market is composed of thousands ofindividual companies in many different industries, these industries canbe categorized into broad sectors of the economy. As an example,Standard & Poor's divides its S & P 500® stocks into 10 sectors: energy;materials; industrials; consumer discretionary; consumer staples; healthcare; financials; information technology; telecommunications services;and utilities. The sector rotation methodology is based on the premisethat no matter what is happening in the overall market, there are alwayssome sectors that are providing greater return on equity investmentsthan others (or, as may have been the case in the recent broad marketdecline, there are always some sectors wherein negative returns are notas steep as in other sectors).

[0035] The sector rotation methodology has a benefit of a potential forgreater profitability than an investment, such as an index fund, in thebroad market. But the methodology also carries a greater risk, as istypical of any investment strategy that focuses on specific areas of theequity markets.

[0036] In the present invention, the sector rotation investments areimplemented as investments in one or more sub-accounts, each in turninvesting in a corresponding equity mutual fund, exchange traded fund,or index fund, all pursuant to a model devised by the insurance companyor an adviser the insurance company or the contract or policy owner hascontracted with. Mutual funds are familiar investment vehicles by whichinvestors pool their money to create a fund which is managed by aninvestment adviser and regulated pursuant to the Investment Company Actof 1940 and the rules promulgated thereunder. Owners of mutual fundshares generally have the right to redeem their investment on anybusiness day at the end-of-the-day net asset value per share of thefund. Index funds are a form of mutual fund which invest in stocksmaking up a specific index. The S & P 500 Composite Stock Index® and DowJones Industrial Average are two of the most well known indexes. In thecase of sector investing, more specialized indexes such as the Dow JonesTransportation Average, or the Dow Jones Utility Average, or the NasdaqTelecommunications Index, may be used. Exchange traded funds, or ETFs,are securities that combine essential elements of individual stocks andindex funds. Like stocks, ETFs are traded on the major U.S. stockexchanges and can be bought and sold through any brokerage account atany time during normal trading hours. Like index funds, ETFs are poolsof securities that track specific market indices or sectors at a verylow cost. ETFs give investors the opportunity to buy or sell an interestin an entire portfolio in a single transaction. ETFs provide theadvantages of traditional index mutual funds, including low annual fees,with the liquidity and ease of execution of stocks that are repricedthroughout the trading day.

[0037] The model may be an asset allocation model, in which case it islikely only a portion of the contract's or policy's account value willbe invested in sectors, as certain asset classes such as fixed incomefunds and cash/money market funds do not typically lend themselves toclassification as sector funds. Or the model may be a style-drivenmodel, in which case it is possible that all of the account value isinvested in sectors.

[0038] In one preferred embodiment, the sector rotation investmentmethodology is implemented in a “fund of funds.” In such a case, theowner of the variable insurance or combination product invests theproduct's account value in a single mutual fund, which in turn investsin other funds representing specific sectors. The “fund of funds”concept can be customized by fund investment advisers such thatindividual fund of funds are designed to be appropriate for investorsinterested in style-driven investments.

[0039] Referring now in detail to the drawings wherein like elements aredesignated by the same reference to numerals throughout, there areillustrated in FIG. 1 both a life insurance policy as well as an annuitycontract according to the preferred embodiment of the present invention.A life insurance policy owner 10 pays premiums 12 to an insurancecompany 20. Upon the death of the insured, the insurance company 20 paysa death benefit 14 under the life insurance policy to the beneficiarynamed by the owner 10. The owner 10 can also remove money from the lifeinsurance policy through withdrawals or loans 16, or surrender 18 of thepolicy, wherein the policy is terminated and the account value, less anysurrender and other payable charges, is returned to the owner 10.Similarly, an annuity contract owner 30 pays premiums 32 to theinsurance company 20. Owner 30 receives annuity payments 34 beginning atthe specified income date, or may be permitted withdrawals 36.

[0040] In the present method, at least some of the account value of theinsurance contract may be invested in an asset allocation orstyle-driven model created with the intent to use the sector selectionrotation investment methodology. As this creates a potential risk ofloss of capital, it is possible that in a combination insurance productthat the owner will make both fixed income investments 22 as well assector selection investments 24 related to the owner's account value.

[0041] The present invention adds the unique feature of sector selectionassets, and the sector rotation methodology, 24 to the life insurancecash value or annuity account value in the context of professionallydesigned models which are geared towards the investor's specificinvestment profile. The value of such assets for the owner will dependon sector performance.

[0042]FIG. 2 is a block flow diagram illustrating steps involved in alife insurance product in accordance with one embodiment of theinvention. Life insurance premiums are paid at step 50. Administrativecharges are deducted at step 52. Mortality charges for the cost of thedeath benefit are deducted at step 54. The balance of the premium isallocated to an asset allocation or style-driven model created with theintent to use the sector selection rotation investment methodology 56,and, if desired, and if the product is a combination insurance product,a portion is also allocated to a fixed income investment 58. The valueof the sector selection rotation investment is periodically determinedin step 60, typically every business day that the stock markets are openfor business. The value of the fixed income investment (if chosen by thepolicy owner in a combination insurance product) will also requireperiodic determination in step 62, and will depend on the interest rateof the fixed income investment of the policy. Such investment willsteadily increase and will not fluctuate in value as will the sectorselection investment. The interest rate of the fixed income investmentwill be guaranteed for a specific period. At the end of that period, thepolicy typically provides that the owner may elect to allow the accruedbalance to roll over for the same period at the then-announcedguaranteed interest rate, or select a new guarantee period with its thencurrent interest rate, or reallocate such account value to the variableseparate account. The premiums may be paid on a monthly, quarterly,yearly or some other basis. (The policy might be a single premiumpolicy, in which case only one premium payment is made.) The cash valuesmay be adjusted on a daily, weekly, monthly or yearly basis, or someother basis. Upon death 64 of the insured, the policy is terminated, andthe death benefit is paid 66 to the policy owner.

[0043] For an annuity contract, premiums are paid and the account valuesare calculated in a manner similar to the life insurance policy. FIG. 3is a block flow diagram illustrating steps involved in an annuityproduct in accordance with one embodiment of the invention. Annuitypremiums are paid at step 70. Certain administrative charges may bededucted before investment of the balance of the premium at step 72. Thebalance of the premium is allocated to an asset allocation orstyle-driven model designed with the intent to use the sector selectionrotation investment methodology 74, and, if desired, and if the contractis a combination annuity contract, a portion is also allocated to afixed income investment 76. Thereafter, other charges are deducteddaily, weekly, monthly, or yearly, and are typically a percentage of oneor more aspects of the contract's values (e.g., its variable accountvalue, or its fixed account value, or its combined account value). Thevalue of the sector selection investment is periodically determined instep 78, typically, every business day that the stock markets are openfor business. The value of the fixed income investment (if chosen by thepolicy owner) will also require periodic determination in step 80, andwill depend on the interest rate of the fixed income investment of thecontract. Such investment will steadily increase in value and will notfluctuate as will the sector selection investment. The interest rate ofthe fixed income investment will be guaranteed for a specific period. Atthe end of that period, the contract typically provides that the ownermay elect to allow the accrued balance to roll over for the same periodat the then current guaranteed interest rate, or select a new guaranteeperiod with its then current interest rate, or reallocate such accountvalue to the variable account. The premiums may be paid on a singlepayment or a flexible payment basis. The account values may be adjustedon a daily, weekly, monthly or yearly basis, or some other basis. Uponreaching the income date, periodic income payments 82 are made to theannuity beneficiary based on the account value at that time.

[0044] Referring to FIG. 4, software system 100 is preferablyimplemented as a main program of a software program that comprisesvarious routines or modules to perform the functions of the presentinvention described herein. Appropriate software structures may beimplemented by persons of ordinary skill in the art to implement thepresent invention. The invention is not limited to the embodimentsdescribed herein.

[0045] The functions of software system 100 may be implemented inspecial purpose hardware or in a general or special purpose computerwith appropriate operating system and memory storage and input/outputdevices. In a preferred embodiment the functions of system 100 arecontrolled by software instructions which direct a computer or otherdata processing apparatus to receive inputs, perform computations,transmit data internally, transmit outputs and effectuate the receiptand transfer of funds as described herein. The present inventionprovides a system for managing annuities and distribution of annuity andlife insurance payments, comprising: (1) data storage for storingproduct information related to: (a) annuity pricing information fordetermining pricing interest rates for said annuities, (b) asset priceinformation for determining actual rates of returns for assetsunderlying said annuities, (c) mortality data for each annuitant of saidannuities; and (2) data processing means for (a) deriving pricinginterest rates from said annuity pricing information, (b) determiningactual rates of returns for said underlying assets of said annuitiesfrom said asset price information, (c) computing actuarial presentvalues and fund reserves from said pricing interest rates and saidmortality data, (d) computing investment performance factors from saidpricing interest rates and said actual rates of return, (e) computinginterest adjustment factors from said actuarial present values, and (f)determining payment progressions for said annuities from said investmentperformance factors and said interest adjustment factors. Data storagemay be provided by any suitable storage medium that is accessible by thedata processor used to implement the invention. Examples include, randomaccess memory, magnetic tape, magnetic disk, or optical storage media.

[0046] Software system 100 receives annuity contract information 112regarding new annuity contracts. This information will typically includeinformation about the contract owner (and annuitant, if that person isnot the contract owner) that is pertinent to mortality, (e.g., age), thetype or types of annuities selected, and the contract owner's investmentchoices. For example, the choice may be a combination annuity involvinga fixed component and a variable component, each with its correspondingperiodic income payment options, with each different component supportedby different underlying asset classes, including a sector investmentasset class. Software system 100 also receives transfer requests fromexisting annuity owners. Annuitant/contract owner information 102 isinput into a memory accessible by software system 100, using anysuitable input device, e.g. by keyboard entry of data into a database.

[0047] Software system 100 also receives product information such asmortality data 104, used in calculation of life insurance premiums, andannuity pricing information 106. Annuity pricing information 104includes fixed income investment information such as market interestrates used to price annuities. These interest rates may be tied to anobjective market rate such as treasury rates, a corporate bond rate orother objective rate. The rates used to price annuities may be relatedto an objective market interest rate by a constant offset, amultiplicative factor, an exponential function, or any other suitablerelationship. Annuity pricing information 104 will also include sectorselection investment annuity pricing information. Software system 100also receives asset price information 108 which comprises the net assetvalues of the underlying assets for each investment subaccount. Assetprice information 108 is used by system 100 to determine the investmentperformance of the assets underlying the annuity funds.

[0048] Software system 100 uses annuity pricing information 106 andmortality data 104 to determine the market value of annuities based onsuch information using annuity pricing routines 110. Software system 100also uses the information to develop both projected, and actual annuitypayment schedules using payment schedule routines 112. Software system100 manages the calculation of an annuity owner's account status 114 andpayments 116.

[0049] The present invention provides a method of administering avariable annuity or life insurance product in which an insurance companyreceives a premium payment for a variable annuity or life insuranceproduct or a combination insurance product and allocates at least aportion of the premium payment to an asset allocation or style-drivenmodel created with the intent to use the sector selection investmentmethodology.

[0050] In the preferred embodiment, the insurance company allocates asecond portion of the premium payment to a fixed income asset investmentoption of a combination insurance product.

[0051] The insurance company, or an investment adviser selected by theinsurance company or the contract or policy owner will periodicallyreview the asset allocation or style-driven models and determine ifalternate sector investment options and/or changing the weighting ofexisting recommended sector percentages provide a greater potentialinvestment return or lower potential risk, given the current state ofthe economic cycle and other considerations pursuant to the sectorselection rotation investment methodology. When a change is made to amodel, the insurance company will, as to each contract or policy ownerwho has selected the model, reallocate the appropriate amount of accountvalue among the various sector investment options In the preferredembodiment, the contract or policy owner will also have the option oftransferring account value from the sector investment options to thefixed income asset investment options, and visa-versa.

[0052] It is to be appreciated that the foregoing is illustrative andnot limiting of the invention, and that other modifications of theinvention may be chosen by persons of ordinary skill in the art, allwithin the scope of the invention as claimed below.

What is claimed is:
 1. A method of administering a variable annuity orlife insurance product, comprising the steps of: an insurance companyreceiving premium payments for said variable annuity or life insuranceproduct of a contract or policy owner; said insurance company allocatingat least a portion of an account value derived from said premiumpayments to an asset allocation or style-driven model, selected by theowner, and created by the insurance company or an adviser selected by itor the contract or policy owner, which model uses the sector selectionrotation investment methodology; said insurance company or an adviserselected by it or the contract or policy owner periodically reviewingsaid asset allocation or style-driven models and determining whetheralternate sector investment options should be included and/or whetherchanging the weighting of existing recommended sector percentagesprovides a greater potential investment return or lower potential riskfor said models; said insurance company reallocating the appropriateamount of account value of all contract or policy owners who haveselected the affected model(s) to the components and percentages ofsector investment options recommended in the model by the creator of themodel(s).
 2. A method in accordance with claim 1, wherein said steps ofreallocating said account value are initiated solely by a financialadviser to said insurance company.
 3. A method in accordance with claim1, wherein said steps of reallocating said account value are initiatedsolely by said contract or policy owner.
 4. A method in accordance withclaim 1, wherein said steps of reallocating said account value areinitiated either by a financial adviser to said insurance company or bysaid contract or policy owner.
 5. A method in accordance with claim 1,wherein some portion of said premium payment may be allocated to a fixedincome asset investment option.
 6. A method in accordance with claim 1,further comprising a fund of funds in which said sector investmentoptions are available as funds within said fund of funds.
 7. A method ofadministering a combination insurance product, comprising the steps of:an insurance company receiving a premium payment for said combinationinsurance product of a contract or policy owner; said insurance companyallocating at least a portion of said premium payment to an assetallocation or style-driven model selected by the owner and created bythe insurance company or an adviser selected by it or the contract orpolicy owner, with the intent to use the sector selection rotationinvestment methodology; said insurance company or an adviser selected byit or the contract or policy owner periodically reviewing said assetallocation or style-driven model and determining whether alternatesector investment options should be included and/or whether changing theweighting of existing recommended sector percentages provides a greaterpotential investment return or lower potential risk; said insurancecompany reallocating the appropriate amount of account value of allcontract or policy owners who have selected the affected model(s) to thecomponents and percentages of sector investment options recommended bythe creator of said model(s).
 8. A method in accordance with claim 7,wherein said steps of withdrawing and transferring said allocatedportion of said premium payment are initiated solely by a financialadviser to said insurance company.
 9. A method in accordance with claim7, wherein said steps of reallocating said account value are initiatedsolely by said contract or policy owner.
 10. A method in accordance withclaim 7, wherein said steps of reallocating said account value areinitiated either by a financial adviser to said insurance company or bysaid contract or policy owner.
 11. A method in accordance with claim 7,wherein said policyholder may transfer allocated premium paymentsbetween said asset allocation or style-driven model and said fixedincome asset investment options, or vice versa.
 12. A method inaccordance with claim 7, further comprising a fund of funds in whichsaid sector investment options are available as funds within said fundof funds.
 13. A software system comprising: data processing apparatus;means connected to said apparatus for inputting data and instructions tosaid apparatus; said software system maintaining a plurality of useraccounts, said software system allocating premium payments received forthe benefit of a contract or policy owner to a user account, saidpremium payments allocated to said user accounts being invested for thebenefit of an owner of said user accounts; at least some premium paymentand/or account value allocated to at least one of said user accountsbeing invested in a sector investment option; said software systemtransferring said allocated account value from said sector investmentoption to alternate sector investment options or to different weightingsof sector investment options upon instruction by a system user.
 14. Asystem in accordance with claim 13, wherein some account value allocatedto user accounts may be invested in a fixed income asset investmentoption.